The exposure of financial institutions to deprived sector lending has declined in the month following the second quarter, states central bank.

The portfolios of financial institutions including commercial banks, development banks and finance companies contain Rs 31.5 billion under the designated deprived sector loans, by mid-March 2013, according to Nepal Rastra Bank (NRB)'s monthly financial statistics.


By the end of mid-February, that is the end of the second quarter, financial institutions had floated loans worth Rs 33.08 billion for the designated deprived sector.


The designated deprived sector loans comprise only 3.5 per cent of the total loans floated by financial institutions. Commercial banks and finance companies are still short of meeting NRB's dictated deprived sector portfolio. Commercial banks have floated loans worth Rs 25.5 billion, development banks have lent Rs 4.01 billion, and finance companies have disbursed Rs 1.96 to the deprived sector.


Since, NRB penalises financial institutions for not meeting deprived sector lending obligation on a quarterly basis, financial institutions manage to increase the presence of such loans in the quarterly report somehow. In the first quarter of the current fiscal year, NRB had slapped a monetary fine on Grand Bank Nepal for not fulfilling the obligation. "It is difficult for urban centric financial institutions to make deprived sector lending," said a chief executive of a finance company.


According to the monetary policy, commercial banks have to lend four per cent of their total loans to the deprived sector while development banks and finance companies have to lend 3.5 per cent and three per cent, respectively. The amount will be increased by 0.5 percentage point next year.


Deprived sector lending refers to small loans that are provided to the poor and rural people for small projects. The loans are supposed to be a measure used by the central bank to promote financial inclusion and establish the habit of formal banking in the rural and poor areas.


"For companies like ours, it is not practical to concentrate on borrowers who want small loans as it becomes very expensive and in the end the borrower has to pay unsustainably higher interest rate," the CEO pointed out.


However, the presence of class 'D' microfinance development banks that work as a go-between for larger financial institutions and micro borrowers have helped channel the banks' capital to the deprived population.


The number of microfinance development banks operating at present has reached 25, with three more that have to come into operation. In 2007, there were 12 microfinance development banks licensed by NRB. Moreover, microfinance has become a lucrative business for banks as well. "The existence of microfinance institutions helps in increasing access to finance for the rural and poor people — the population that is not being covered by larger financial institutions," said central bank spokesperson Bhaskar Mani Gyanwali.


"Nepal Rastra Bank has not stopped issuing licences to class 'D' financial institutions for the said reason though there is a hiatus for licensing of class 'A', 'B' and 'C' financial institutions," Gyanwali added.

Source: THT

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